SEC Financial Reporting Bulletin 6 to 12 (SRC Rule 68)

On February 16, 2012, the Securities and Exchange Commission issued Financial Reporting Bulletins 1 to 5 to assist corporations and their accountants/auditors in complying with their financial reporting obligations, and to ensure consistency of implementation. Download SEC Financial Reporting Bulletins 1 to 5 here.

On April 3, 2012, issued another seven Financial Reporting Bulletins (6 to 12) to clarify further other matters to comply with the provisions of the SRC Rule 68, as amended. Following are the subject matters of the issued Financial Reporting Bulletins 6 to 12:

Bulletin 006: Deposit for Future Stock Subscriptions

Bulletin 007: Statement of Management Responsibility

Bulletin 008: Small and Medium-sized Entities

Bulletin 009: Micro Entities

Bulletin 010: Entities in the Process of Filing Financial Statements (issuance of equity or debt instruments)

Following are the detailed discussions in the Financial Reporting Bulletins 6 to 12:

Bulletin 006: Deposit for Future Subscriptions

PAS 32 defines an equity instrument as any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Such residual interest arises from holding shares of stock as provided in the Corporation Code (the Code).

Under the Code, a stock corporation is empowered to issue or sell stocks to subscribers in accordance with the provisions of the Code. Such issuance should only be to the extent of the capital stock approved or authorized by the Commission. If there is no more authorized capital stock, an increase thereof for the purpose of issuing additional stocks may be made by the company subject to the approval by its Board of Directors, stockholders and the Commission.

On the basis of the foregoing, a company should not consider a deposit for future subscription as an equity instrument unless all of the following elements are present:

There is a lack of insufficiency of authorized unissued shares of stock to cover the deposit;

The company’s Board of Directors and stockholders have approved an increase in capital stock to cover the shares corresponding to the amount of the deposit; and,

An application for the approval of the increase in capital stock has been presented for filing or filed with the Commission.

If any or all of the foregoing elements are not present, the transaction should be recognized as a liability.

Bulletin 007: Statement of Management’s Responsibility (SMR)

(1) For issues of securities to the public, the SMR shall be attached to both the consolidated financial statements and the parent company’s financial statements for filing with the Commission.

(2) Paragraph (iv) of Part I (2)(B)(iv) of the Rule is also applicable to representative offices established in the Philippines. Thus, the SMR shall be signed by its local manager or chief representative in the Philippines.

(3) If the financial statements for filing are comparative, the SMR has to be comparative, even if the independent auditors for the comparative periods are different.

The following is an illustration on how the last paragraph of the SMR may be worded in such a case:

“(name of audit firm) and (indicate prior year auditor), the independent auditors appointed by the stockholders for the period December 31, 2011 and 2010, respectively, have examined the consolidated financial statements of the company in accordance with the Philippine Standards on Auditing, and in their reports to the stockholders (or members), have expressed their opinion on the fairness of presentation upon completion of such examination.”

Bulletin 008: Small and Medium-sized Entities

Under Part I (2)(A)(ii)(b) of the Rule, certain types of SMEs may be exempted from the mandatory adoption of the Philippine Financial Reporting Standards (PFRS) for SMEs and may instead apply, at their option, full PFRS. SMEs that availed of the exemption and applied the full PFRS are not considered as large and/or publicly-accountable entities and therefore are not required to file the tabular schedule of all effective standards and interpretations under the PFRS as of year-end, as required under Part I (4)(J) of the Rule.

Bulletin 009: Micro Entities

(1) Under SEC’s Notice of Implementation Guidelines on PFRS for SMEs dated February 9, 2010, micro entities have the option to use any of these bases of accounting in the preparation of their financial statements: (a) full PFRS, (b) PFRS for SMEs, or (c) another acceptable basis of accounting.

Under Part I (2)(A)(iii) of the Rule, micro entities have the option to use as their financial reporting framework the income tax basis, accounting standards in effect as of December 31, 2004 or PFRS for SMEs.

Micro entities which previously adopted full PFRSs in accordance with SEC’s Notice of Implementation Guidelines on PFRS for SMEs dated February 9, 2010 are allowed to continue the use of full PFRS. Nevertheless, micro entities may also choose to change their financial reporting framework to one of the options made available under the Rule. Such change should be accounted for in accordance with PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

(2) Micro entities are not required to disclose in the notes to the financial statements their rationale for choosing a particular financial reporting framework available to them.

(3) Micro entities that continue to use full PFRS are not required to file the tabular schedule of all the effective standards and interpretations under the PFRS as of year-end as required under Part I (4)(J) of the Rule.

Bulletin 010: Entities in the Process of Filing Financial Statements (issuance of equity or debt instruments)

Financial statements to be filed by entities for the purpose of issuing any class of instruments (whether shares of stock or bonds) in a public market are required to comply with the provisions of Part II of the Rule, including Annexes 68-D and 68-E. Likewise, the following documents are to be filed with the financial statements, as required by Part I, Section 4 of the Rule:

(1) Issuers of securities to the public and stock corporations with unrestricted retained earnings in excess of 100% of paid-in capital stock – A Reconciliation of Retained Earnings Available for Dividend Declaration which shall present the prescribed adjustments as indicated in Annex 68-C of the Rule.

(2) Listed companies and investment houses that are part of a conglomerate or group of companies – A map showing the relationships between and among the companies and its ultimate parent company, middle parent, subsidiaries or co-subsidiaries, and associates.

(3) Large and/or publicly-accountable entities – A schedule, in table format, showing in the first column a list of all effective standards and interpretations under the PFRS as if year-end, and an indication opposite each in the second column on whether it is “Adopted”, Not Adopted” or “Not applicable”.

The above components should be covered by an auditor’s report.

Bulletin 011: Non-stock and Non-profit Organization

The provisions of Part I (3)(iv)(v) of the Rule, regarding capital deficiency, shall not be applicable to non-stock and non-profit organizations with negative fund balance.

Bulletin 012: Annex 68-E (Schedule of Financial Assets)

The schedule shall be applicable for Available-For-Sale (AFS), Fair Value through Profit or Loss (FVPL) and Held-to-Maturity (HTM) investments. Loans and Receivables shall be included in the schedule only if the information requirements are applicable.

For example, trade receivables of a reporting entity need not be included in Schedule A but Long-term Commercial Papers classified under Loans and Receivables shall be included.

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Orlando CalundanOrlando Calundan is a CPA who has exposures in FS audit of entities in various industries such as real estate, food/restaurants, manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.